ACCOUNTING OF FIRST CATEGORY INCOME TAX IN LEASE PAYMENTS BY TENANTS

Introduction

At present, operating leases mean an implicit source of financing for the exploitation of goods (movable and immovable) of third parties in the development of the activities of the companies; In this sense, the International Financial Reporting Standard – IFRS 16 «Leases» requires that lessees recognize in their statements of financial position (balance sheets), the right-of-use asset and lease liability for all lease contracts, except specific exceptions.

What is required by the International Financial Reporting Standard – IFRS 16?

The spirit of IFRS 16 is to provide a consistent and transparent approach to the recognition, measurement, presentation and disclosure of leases, without distinguishing between operating and financial. The aforementioned standard aims to improve transparency and comparability in the financial statements of companies, ensuring that leases are recognized in the financial statements as right-of-use assets and lease liabilities, and that they are adequately reflected in the financial statements. rights and obligations arising from leases.

What must lessees include in their financial statements?

In compliance with the requirements of the Standard, lessees will present the following accounting items in their financial statements:

  • Right-of-use asset and lease liability recognized (statement of financial position).
  • Depreciation of all right-of-use assets (income statement)
  • Financial expenses are calculated on the balance of the lease liabilities (income statement).
  • Payments for leases as a financing activity (statement of cash flows).

What needs to be resolved and in what context?

Under the scenario, that all the leases are developed in a context of business formality, the first category Income Tax is applied for rent, paid by the lessors. A lessor provides the rental service and therefore must pay the aforementioned tax to the Tax Administration, which will be supported by the amount stipulated in the contract and the payment receipts issued to the lessee.

In this regard, the conditions of the contract must be considered, where, in many cases when the lessor is a natural person, it is stipulated that the Income Tax will be charged (it does not deduct from the amount of the agreed rental fee) and responsibility of the tenant; for this reason and due to the nature of the payment clauses, the lessee will not be able to recover the Income Tax assumed and paid to the Tax Administration. Consequently, a part paid by the renter is not refundable.

The principles of recognition of assets and liabilities for right of use, have the purpose of achieving the same presentation for leased assets as for purchased assets, IFRS 16 does not establish criteria for the treatment of unrecoverable taxes payable and account of the lessee , which for the present context is the first category Income Tax. This particularly affects entities in sectors where lessors.

So, the question that needs to be resolved is whether the first category Income Tax should be considered as part of the lease payments or if it is an individual charge. The standard also does not specify whether the amount of first category Income Tax must form part of the cost or be accounted for as an expense, in addition to considering the moment in which this amount is recognized.

Should the irrecoverable first category Income Tax be included or not in the calculation of the present value of the minimum lease payments?

In this regard, the International Financial Information Interpretations Committee – IFRIC, carried out technical analysis and research sessions and received numerous responses from members of the International Forum of Accounting Standards Issuers, securities regulatory entities and accounting firms on how to account for non-recoverable taxes. The scope carried out by the IFRIC Committee did not provide sufficient evidence to define whether these non-recoverable taxes should be part of the estimate of right-of-use assets and liabilities. Consequently, IFRIC tentatively decided not to add a standard setting project to the work plan. The decision not to add this topic to the work plan was confirmed by the IASB at its October 2021 meeting.

Our appreciation on this particular

Given the contractual leasing conditions in Peru, the first category Income Tax falls on the lessee and acts as tax collector. Consequently, and in our opinion, the first category Income Tax is not a lease payment (regardless of whether it is unrecoverable or not) since the payment is not credited to the lessor’s treasury in exchange for the right to use the asset. (movable or immovable property). The lessee must first consider whether the first category Income Tax is an initial direct cost, in which case it will form part of the estimate of the right-of-use asset and liability. Or, failing that, we contemplate that the lessee runs with a kind of accounting policy option to consider the first category Income Tax within the context of the contract and by analogy, with the requirements of the International Accounting Standard – IAS 16 » Property, Plant and Equipment” which resolves in its paragraph 16, “the cost of property, plant and equipment includes: …(a) Their acquisition price, including import duties and non-recoverable indirect taxes on the acquisition…».

Juan Barragan Herrera
Audit Supervisor
Russell Bedford Peru